NorthgateArinso buys its way to top spot in Enterprise HRO – and it only cost them $100m

March 4th, 2010

Mike Ettling, NorthgateArinso CEO

So one of the worst-kept secrets in the HRO business finally came to fruition today, when the British HR services provider NorthgateArinso acquired Convergys’ HRO business for $100m.

By our calculations, that gives the newly-formed entity a 15% market share of the enterprise HRO market (engagements with firms greater that 15,000 staff). We’ll confirm this fact when we update our HRO market landscape in a couple of months.

The merger effectively moves them above IBM, Accenture, ACS and Hewitt into the leading position in the market from an employees-served perspective; not a bad day’s work from a British payroll firm that acquired an upstart Belgian SAP-payroll integration shop. This also elevates NorthgateArinso firmly into the high-end of the enterprise HRO business, in addition to the mid-market scrap with the likes of ADP and Ceridian.

Why this merger makes a whole load of sense

Payroll-centric HRO is in high demand. As we revealed in our industry study last month, there is renewed appetite for HR services as businesses limp their way out of recession. This is especially the case where payroll is at the heart of the customer requirement and customers need a solid mix of software implementations expertise, backed up by low-cost processing capability (near shore and offshore) and HR domain expertise. So this acquisition is timely. It’s also been a long time in the works, and NorthgateArinso has clearly thought long and hard before making the plunge.The US market was the gap in NorthgateArinso’s armoury. NorthgateArinso could have made an alternative play into the benefits outsourcing arena and bid for the likes of ExcellerateHRO or ACS’s HR business, but it’s decided to stick to its knitting and fill out the one yawning gap in its armory – it’s ability to win US business. “We were winning too many of the international components of deals, and customers kept the US services inhouse”, CEO Mike Ettling (pictured) told us earlier today. Convergys gives them US strength and depth in spades. The highest concentration of multinationals are still in the US and their expenditure dominates the HR services market. Moreover, Convergys’ international presence is quite a snug fit with NorthgateArinso’s business (the addition of Sao Paolo and Budapest, along with a promising Asia/Pac benefits business are good additions to have for the future).

Convergys’ woes appear to be behind them. Only two of Convergys’ 21 clients had contrived to be unprofitable, but these are now in a much healthier position, having been ring-fenced and restructured. NorthgateArinso will have the challenge of delivering on Convergys’ promises, but they’ve looked long and hard at the issues here, and know what they’re letting themselves in for. Moreover, $100m is a great price for a strong book of business. Even if one of those two remaining deals is problematic, they can deal with it.

Both SAP and Peoplesoft (Oracle) clients can be serviced. While Northgate has enjoyed expanding the Arinso EuHReka business, which focuses on an SAP-based SaaS/BPO delivery model, the Convergys element really does beef up the company’s Peoplesoft capabilities. And, unlike the unrealistic promises being made by some of its competitors, Northgate is being refreshingly realistic that it will not attempt to develop genuine multi-tenancy around Peoplesoft. That would be no easier to achieve than healthcare reform…

The Bottom-line: Great buy for NorthgateArinso at a great price, but the hard work begins now

Noone denies that old-world HRO turned into a bit of a train-wreck, where many contracts became unprofitable and providers struggled to ring-fence them and re-structure them. Convergys and others were guilty of taking on some deals that brought down executives, upset Wall Street and cast a dark shadow over the HRO industry. However, smart firms like NorthgateArinso are sticking to their knitting and focusing on global client work they know they can deliver profitably. The global payroll market opportunity is massive – CFOs cannot function properly when they can’t have a handle on their global employees, and our research repeatedly reinforces this desire to improve the effectiveness of global operations.

NorthgateArinso now truly has a strong foothold with multi-national opportunities, however, their real challenge starts now. They now have to compete even more aggressively with the likes of IBM and ADP, where they will need to bring the best out of their existing client portfolio to prove they can truly take on that missing piece – the US market. Convergys gives them a bigger engine, now they have to fine-tune it to a performance level noone’s really attaining in the HR services industry right now. Here’s a chance to make HR services history – they now need to shore up their management and delivery talent to achieve it.

6 Comments

Good post on the latest change in the HRO market. I agree with your thinking on why this is a very positive move for NorthgateArinso. Both parties will bring different strengths, Convergys will enhance the overall implementation and HR service delivery capability through its US and Budapest centers & NGA will bring its technical skills and innovation. Wondering what the next big move in the market will be……

@Andy: suspect some consolidation in the bens space… the Indian providers had a look at the HRO space and quite like payroll, but the cost of taking out the established players is too prohibitive for them – don’t see them moving in for a while now. Xerox could be a wild card here – they may find HRO more to their liking than F&A and make a couple of moves there (one obvious candidate comes to mind here…). ADP is due an acquisition, especially in this climate – I’d expect something from them soon… Fidelity may seek to ramp up their bens business. Lots to consider… but I did like this Northgate move – made a lot of sense, both strategically and finanically. Interesting to have a strong Euro play move into the US corporate market.

I am a HRO pundit. Prior to writing my observations, I have put on my flame suit in preparation for a Stelzner reply that shares a different perspective =)

I do not believe that multi-tier HRO will work without the clients agreeing to standardization. And HR clients don’t agree to standardization because their process are incredibly diverse. Just think about the process of hiring, which requires a people master (Oracle/PeopleSoft), a hiring automation tool (Taleo), a background checking firm (HireRight), a temp labor automation firm for temp-to-perm (FieldGlass), an outsourced managed service provider to manage temp labor firms (pick from a wide variety), external recruiters, some level of scanning/imaging/storage for all the final documents, and probably some things I can’t think of right now. It’s like making soup – we all eat it, and there are countless recipes. Since the multi-tier HRO vendors cant get economies of scale, their businesses are limited.

I like when outsourcing vendors focus. Payroll is a great focus as most companies outsource this function and it has a clear method of delivering the service, though there are variety of ways to approach time card entry, integration with POS for time entry, and a few ways handling the banking processes and reconciliation. It’s still distinct enough and a sufficiently mature process to stand on its own.

This acquisition is about focus for both organizations.

Convergys lost focus on their call center outsourcing business because they thought HRO was about the HR call center, but it turned out to be so much, much more. Returning to the call center focus is good for Convergys as their isn’t sufficient overlap in the functions. Read Convergys’ 2008 10k (annual report) for the underlying tone of their perspective of the HR business (page 8) that includes comments like, “it is not expected to be the future growth driver we once envisioned” and “results here are clearly not satisfactory.”

NorthgateArinso gets an established HRO business, US relationships, and a strong toe-hold in the US marketplace. And they get more payroll, which is good for their focus area. I suppose they got a reasonable deal on this acquisition, but the truth is Convergys is relieved to dump this business for $100M, given that the HR Management division of Convergys is operating at a gigantic loss.

Buyers who are managing existing relationships with Convergys that will be transitioned should be thoughtful and inquisitive about how NorthGateArinso handles renewals or unprofitable contracts. This is a money losing business, and I suspect their will be limited in interest by NorthGateArinso management to continue unprofitable contracts.

Excellent synopsis Phil – and great to have you back on the analyst side of the fence – you were missed

Not sure I entirely agree with Tony that this is a “money losing business”. I’d say it WAS a money-loser, but the new breed of providers are approaching these client engagements in a far more sensible way. Will take time to prove the new model, but the increased focus on standardized payroll and common HR process / standards is slowly transforming the business to something that will make it a profitable growth industry,

My comments about money losing were specific to Convergys’ HR Management division, which is the acquisition in this announcement.

This is a money losing group according to SEC filings. NorthgateArinso bought this for a bit more than book value.

Of course, other companies can make money in this business. I’m just saying, NorthgateArinso didn’t buy a profitable business for $100M. It bought assets, sales contacts, and the ability to put a few more dots in the USA on the standard geographic reach slide prevalent in all outsourcing vendor pitch decks. The winner here is Convergys which offloaded the unit and I bet the raised their guidance more than the $100M sales price, as this was an anchor around their neck…or at least a couple of the mega deals made it seem that way on paper.

Northgate Arinso is Number 1 globally for this type of business, and many employers are looking to outsource their benefits management, they may not get far with the HR side buut benefits and Payroll management is what employers are looking for and since they are number one globally they have a head start on convergys because they know how to operate and make profit in this line a business. COnvergys just gave them the foundation to add to thier current business in North America, They are already established in many other countries, they will be the number 1 Third Party Administartor for these services nation wide and thier profit will increase as they already have revenue irregardless of Convergys status upon purchase, many companies fail because of poor management not that the business is poor.